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Monday, July 25, 2011

L&T Finance IPO - After SKS & Muthoot, Another Overpriced NBFC IPO?

The Initial Public Offering (IPO) of L&T Finance Holdings Ltd, the non-banking finance company (NBFC) promoted by India’s engineering major Larsen & Toubro Ltd (BSE: 500510, NSE: LT), is all set to open on 27th July with a price band of Rs. 51-59.

The offer price appears deceptively cheap, as it is just around 6 times the face-value of Rs. 10. But going deeply into what is being offered at this cheap rate, an altogether different picture unravels.

The offered share’s FY’11 EPS is just Rs. 2.83, making this offer’s price-earnings multiple above-average at almost 21 times at the upper end of the price band. In sharp contrast, listed NBFCs that are performing fundamentally and in the secondary market, is available between 12 to 16 times. Shriram Transport Finance (BSE: 511218, NSE: SRTRANSFIN) is available for 12 times P/E, while Mahindra & Mahindra Financial Services (BSE: 532720, NSE: M&MFIN) is available at a P/E of 16.

On the other hand, the core financial performance of the company, as measured by return to its investors, is not higher than the industry average, to command such a high valuation. In fact, the situation is just the reverse with L&T Finance Holding’s FY’11 Return on Equity (RoE) being 13.58% as against Shriram Transport’s superior returns of 24.87% and M&M Financial’s 19.36% for the same period.

Coming to Net Asset Value (NAV) per share also, L&T Finance Holding is not shining, with a Book Value of just Rs. 20.40, that translates to a high price-to-book-value of almost 3 times for this IPO. By this metric also, there are enough comparable peers in the listed space, which are trading much cheaper. For example, both Bajaj Finance (BSE: 500034, NSE: BAJFINANCE) and Sundaram Finance (BSE: 590071, NSE: SUNDARMFIN) are available at a P/BV of 2 times.

A query sent by Seasonal Magazine to L&T Finance Holdings to ascertain the rationale for such high-valuations remained unanswered at the time of publishing this story.

L&T, the promoter of the company seems to have gone for these kinds of hefty valuations, keeping in mind only their brand value and their own long history in the listed sphere as a blue-chip. stock It remains to be seen whether that brand value in the engineering & construction sector would play out to their advantage in the financial space, which has its own set of deeply entrenched players like the houses of HDFC, ICICI, Kotak, Shriram, Bajaj etc.

Looking at L&T Finance Holdings’ and its subsidiaries’ portfolios, though they are present in most segments, these L&T firms are not strong in high-momentum NBFC sectors like home loans and auto finance. This is definitely a dampener, for investors focused on the financial space.

In contrast, L&T Finance Holdings has a lot of exposure in infrastructure financing. But with that sector’s longer gestation projects, the short-term earnings growth is likely to be under pressure always. The only visible advantage over here is the possible synergies in driving up this business with parent firm, Larsen & Toubro.

The company also has a sizeable exposure in the microfinance segment. With stocks in that sector like SKS Microfinance (BSE: 533228, NSE: SKSMICRO) causing huge losses for investors, L&T Finance Holdings will have a tough time assuring investors regarding the ongoing safety of their microfinance exposure.

Considering the timing of this IPO now, which finally happens after a long wait, but is still undeniably a tough time for the financial sector, especially NBFCs, due to the rate-tightening and regulatory pressures. This raises doubts whether the company was under any kind of pressure to raise funds in an emergency. A query sent by Seasonal Magazine to L&T Finance Holdings on this regard remained unanswered.

If one looks at the highly successful listed NBFCs, almost all of them are niche-plays, like home loans, auto loans, gold loans etc, as against L&T Finance Holding’s model where it has fingers in all pies. Such an NBFC model is yet to deliver outstanding success in the listed space.

The only real advantage enjoyed by the company is a possible banking licence in the future. But this is nowhere near, and is fraught with uncertainties. For example, RBI is already averse to offer banking licence to groups with exposure to real estate development. Nobody is sure whether such an aversion won’t be extended to the related field of infrastructure development.

Retail investors who are considering this issue at all would be better off by waiting for better prices post IPO and listing, much like how SKS Microfinance and Muthoot Finance (BSE: 533398, NSE: MUTHOOTFIN) became available for much cheaper rates in the secondary market after their IPOs.